MTS Systems Stock Much Cheaper than Technology Peer Group If you scan through valuations of technology companies, you’ll seldom find stocks that trade near... MTS Systems Corporation: Great Upside as the Global Economy Picks Up

MTSC stockMTS Systems Stock Much Cheaper than Technology Peer Group

If you scan through valuations of technology companies, you’ll seldom find stocks that trade near their book values. Of course, some of these stocks may deserve their low valuations, but there are contrarian opportunities, given the comparative valuations.

That’s the situation with small-cap MTS Systems Corporation (NASDAQ:MTSC), a contrarian opportunity that should benefit from the global economic renewal in the wake of the COVID-19 pandemic.

MTS Systems develops high-performance testing, simulation, and measurement systems and sensors to clients worldwide. The company’s solutions include hardware, software, and services that help businesses design, develop, and manufacture products.

MTSC stock traded as low as $12.15 in May 2020 prior to staging a strong rally to a range high of $60.69 in January 2021.

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The following chart shows MTS Systems stock breaking out after the emergence of a golden cross pattern, a bullish formation that appears when the 50-day moving average breaks above the 200-day moving average.

Chart courtesy of StockCharts.com

Economic Renewal Supports Bull Case for MTSC Stock

The five-year revenue picture saw MTS Systems Corporation grow its revenues by double-digits in 2017 and 2019, prior to declining in the pandemic-impacted 2020.

Fiscal Year Revenues (Millions) Growth
2016 $650.5 N/A
2017 $787.5 21.1%
2018 $778.4 -1.2%
2019 $891.5 14.5%
2020 $828.6 -7.1%

(Source: “MTS Systems Corp.” MarketWatch, last accessed February 25, 2021.)

While there are uncertainties about the future of the economy, MTS Systems will likely benefit from the global renewal.

At this time, analysts expect the company’s revenues to come in at a flat $833.2 million in 2021 and grow by 3.3% to $900.6 million in 2022. These are not great numbers, but MTS Systems could deliver surprises. (Source: “MTS Systems Corporation (MTSC),” Yahoo! Finance, last accessed February 25, 2021.)

A major plus has been the ability of MTS Systems to consistently deliver positive earnings before interest, taxes, depreciation, and amortization (EBITDA) from 2016 to 2020. From 2017 to 2019, the company’s EBITDA growth rate was superior to its revenue growth.

Fiscal Year EBITDA (Millions) Growth
2016 $68.4 N/A
2017 $93.9 37.3%
2018 $102.8 9.4%
2019 $122.0 18.7%
2020 $108.5 -11.1%

(Source: MarketWatch, op. cit.)

MTS Systems Corporation generated profits on a generally accepted accounting principles (GAAP) earnings-per-share (EPS) basis in four consecutive years, prior to generating a GAPP EPS loss in 2020.

Fiscal Year GAAP Diluted EPS Growth
2016 $1.70 N/A
2017 $1.31 -22.9%
2018 $3.18 142.7%
2019 $2.21 -30.3%
2020 -$14.16 -739.4%

(Source: MarketWatch, op. cit.)

On an adjusted basis, MTS Systems Corporation reported profits of $2.03 per diluted share in 2020. But watch for a decline to $1.36 per diluted share in 2021 prior to a rally to $1.83 per diluted share in 2022. (Source: Yahoo! Finance, op. cit.)

MTS Systems managed to drive positive free cash flow (FCF) in the last five years, albeit there were declines in the last three years.

Fiscal Year FCF (Millions) Growth
2016 $47.1 N/A
2017 $53.9 14.4%
2018 $50.8 -5.7%
2019 $42.9 -15.5%
2020 $23.9 -44.2%

(Source: MarketWatch, op. cit.)

The positive FCF is welcome as MTS Systems Corporation grapples with its debt (about $482.0 million of net debt as of the end of December 2020). (Source: Yahoo! Finance, op. cit.)

I don’t see the debt as being a problem at the moment, given the company’s current Altman Z-score of 3.1, which suggests it’s in a safe zone as far as bankruptcy risk goes.

Analyst Take

MTS Systems stock has high institutional ownership, with 216 institutions holding MTSC stock. The top investor is Blackrock Inc. (NYSE: BLK), with about 15.9% of the outstanding shares. (Source: Yahoo! Finance, op. cit.)

Insiders have also been buying MTS Systems stock; over the last six months, insiders added 73,702 shares.

As far as its valuation goes, MTSC stock trades at an attractive 1.26 times its consensus 2022 revenue estimate. Compared to many of the high-flying technology stocks, it looks cheap. The thing is, MTS Systems Corporation needs to deliver consistency in terms of its financials.

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